Home Depot 2009 Annual Report Download - page 33

of vendor allowances earned based on expected volume of purchases over the incentive period is an accurate
reflection of the ultimate allowance to be received from our vendors.
Volume rebates and advertising co-op allowances earned are initially recorded as a reduction in Merchandise
Inventories and a subsequent reduction in Cost of Sales when the related product is sold. Certain advertising
co-op allowances that are reimbursements of specific, incremental and identifiable costs incurred to promote
vendors’ products are recorded as an offset against advertising expense in SG&A.
Impairment of Long-Lived Assets
We evaluate our long-lived assets each quarter for indicators of potential impairment. Indicators of impairment
include current period losses combined with a history of losses, management’s decision to relocate or close a
store or other location before the end of its previously estimated useful life, or when changes in other
circumstances indicate the carrying amount of an asset may not be recoverable. The evaluation for long-lived
assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level.
The assets of a store with indicators of impairment are evaluated by comparing its undiscounted cash flows with
its carrying value. The estimate of cash flows includes management’s assumptions of cash inflows and outflows
directly resulting from the use of those assets in operations, including gross margin on Net Sales, payroll and
related items, occupancy costs, insurance allocations and other costs to operate a store. If the carrying value is
greater than the undiscounted cash flows, an impairment loss is recognized for the difference between the
carrying value and the estimated fair market value. Impairment losses are recorded as a component of SG&A in
the accompanying Consolidated Statements of Earnings. When a leased location closes, we also recognize in
SG&A the net present value of future lease obligations less estimated sublease income.
We make critical assumptions and estimates in completing impairment assessments of long-lived assets. Our
cash flow projections look several years into the future and include assumptions on variables such as future
sales and operating margin growth rates, economic conditions, market competition and inflation. A 10%
decrease in the estimated undiscounted cash flows for the stores with indicators of impairment would not have a
material impact on our results of operations. Our estimates of fair market value are generally based on market
appraisals of owned locations and estimates on the amount of potential sublease income and the time required
to sublease for leased locations.
As part of our Rationalization Charges, we recorded no asset impairment and $84 million of lease obligation
costs in fiscal 2009 compared to $580 million of asset impairments and $252 million of lease obligation costs in
fiscal 2008. See Note 2 to the Consolidated Financial Statements for more details on the Rationalization
Charges. A 10% decrease in estimated sublease income and a 10% increase in the time required to sublease
would not have a material impact on results of operations. We also recorded impairments on other closings and
relocations in the ordinary course of business, which were not material to the Consolidated Financial
Statements in fiscal 2009, 2008 and 2007.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired. We do not amortize
goodwill, but do assess the recoverability of goodwill in the third quarter of each fiscal year, or more often if
indicators warrant, by determining whether the fair value of each reporting unit supports its carrying value. The
fair values of our identified reporting units were estimated using the present value of expected future discounted
cash flows.
We make critical assumptions and estimates in completing impairment assessments of goodwill and other
intangible assets. Our cash flow projections look several years into the future and include assumptions on
variables such as future sales and operating margin growth rates, economic conditions, market competition,
inflation and discount rates. A 10% decrease in the estimated discounted cash flows for the reporting units
tested would result in an impairment that is not material to our results of operations. A 1.0 percentage point
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